MAC: Mines and Communities

Coal gets doomed even further

Published by MAC on 2020-07-17
Source: mining.com (2020-07-15)

The Corona Virus pandemic has joined with investors' misgivings, in bringing coal down to a uniquely low level  of demand - in the USA at any rate.

Pandemic sharpens focus on US coal’s ESG risks – report

mining.com

15 July 2020

The US coal industry has weakened after taking the brunt of lower
electricity demand and is now highly vulnerable to resurgent covid-19
infections that could further reduce demand for coal in a downside
scenario, Moody’s Investors Service said in a report published on
Wednesday.

The credit rating agency expects a ‘very weak’ second-quarter earnings for
coal producers.

“In 2020, demand for electricity has fallen sharply since March, largely
because of the economic impact of the pandemic, and we expect that
consumption of coal by the electric power sector will fall by more than
30% in 2020,” says Benjamin Nelson, Moody’s VP-Sr Credit Officer.

The arrival of the coronavirus outbreak in the US significantly
reduced coal producers’ expected cash flow

Export prices had been weakening since the second half of 2018 and have
deteriorated further following the coronavirus. Metallurgical (met) coal
price fell from $200/mt in June 2018 to close to $110/mt in June 2020,
Moody’s reports.

Volumes are also under stress with the slowdown in the global steel
industry. Global production was reduced by about 5% through May, including
steep declines in North America, European Union, and South America
combined with a modest increase in China.

Coal producers’ liquidity has also weakened markedly in 2020. At the start
of the downturn, the aggregate cash balance of US rated producers was $1.5
billion, and most of them had substantial availability under revolving
credit facilities along with Speculative-Grade Liquidity (SGL) ratings of
SGL-1 and SGL-2—the highest on the four-point SGL scale.

The arrival of the coronavirus outbreak in the US, combined with the
ongoing secular decline in demand for thermal coal and several quarters of
price weakness for export coals, significantly reduced coal producers’
expected cash flow, and in some cases narrowed their expected compliance
with financial maintenance covenants, Moody’s reports.

ESG issues with respect to the US coal industry have tightened access
to capital for companies in the sector

“Only the low-cost, met-focused producers such as Arch Resources and
Warrior Met Coal have not experienced a recent downgrade to long-term
ratings nor an outlook revision, as they have fundamentally stronger
discretionary cash flow generation than their peers.”

Environment, Social, Governance

Access to capital issues are becoming increasingly significant for the
coal industry as ESG-related concerns intensify. According to the report,
the pandemic will sharpen the focus on ESG risks.

“ESG issues with respect to the US coal industry have tightened access to
capital for companies in the sector, as a number of investors have
signaled their aversion from coal-related holdings or signaled a
willingness to punish coal companies.”

While many Ba- and B-rated industrial companies have accessed the bond and
syndicated bank loan markets since the start of the pandemic, coal
producers have not.

 

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